4 Reasons The Venture Capital Boom Is Damaging Entrepreneurs’ Mental Health

Unprecedented levels of investment capital. Record-breaking valuations. Huge personal fortunes. The tech gold rush that reached new heights in 2021 shows few signs of slowing down this year. For entrepreneurs, this has created the perfect environment to build faster and bigger than ever before.

Yet not everything is as well as it seems. The ongoing market ebullience is creating significant risks to entrepreneurs’ mental health as they work harder than ever to keep up with the frenzied pace.

In the world of venture-backed startups, there are four main pressure points that entrepreneurs, investors, and their support networks need to be aware of.

Extreme FOMO

Most of us will have experienced the power of FOMO and much has been written about the damage to mental health caused by comparing ourselves with others. For entrepreneurs met each day with news of the latest blockbuster $100m pre-money seed round or multi-billion dollar exit, it is hard not to compare themselves with others and feel that they are falling behind and missing out.

Yet making these comparisons – beyond a sensible level of ongoing competitor monitoring – is counter-productive. Entrepreneurs already put considerable (and sometimes too much) pressure on themselves to succeed. Allowing the noise online to add to it is unhealthy and can cloud robust decision-making. Entrepreneurs need the headspace to make optimal decisions that contribute to building profitable, long-lasting companies, not chase vanity metrics.  

One common misconception is that entrepreneurs primarily need support in downturns (or during unexpected events like the pandemic), but the reality is that the level of pressure in a bull market can be an equal challenge that warrants understanding and an empathetic ear from investors.

Unachievable Workloads

Entrepreneurs who choose to build venture-backed startups are a tough group. Growing a company rapidly whilst also having to raise capital periodically is an extremely challenging role.

Until relatively recently, there was an accepted cycle that allowed entrepreneurs to manage growing their business with raising funding. They would raise enough capital for about 18 months of operations (known as runway), allowing them to put their head down and focus on building the company for 12 months, and then spend up to six months securing the next round of funding. There was always the subtle art of ongoing investor relationship-building to be managed, but broadly this split worked.

Now, in a market characterized by pre-emptive offers and compressed timelines between rounds of funding, entrepreneurs find themselves building their company and continually fundraising. It is stretching their resources in a way that, without careful management, risks burnout.

Misaligned Boards  

Building a successful company is not a linear endeavor. Revenues do not tick up predictably (and rapidly) each month. It takes a lot of hard work to achieve product-market fit and build a reliable sales engine that delivers consistent results. Early-stage investors know this and provide support, resources, and coaching with a healthy dose of empathy when things do not go to plan.

Later stage investors also know this. It is why in the past they would only look to invest in a company when revenues had reached a certain level and a reasonably predictable growth rate. Today, however, the market for the most promising investments is so competitive that later-stage funds invest earlier and compromise their traditional revenue metrics. For example, a Series A fund that would see $1m of annual recurring revenue (ARR) as a ballpark minimum requirement, now has to get comfortable with half that number (or even less in the most competitive deals).

For entrepreneurs, a later stage fund investing in your company earlier than usual might seem like a good outcome. It can be flattering and feels reassuring that you are supported by a fund with deep pockets that can play a material role in future funding rounds. The reality can be quite different.

Growth investors have high expectations. They also tend to have backgrounds in finance rather than operations. Their role is to ensure that companies stick to – and ideally exceed – budget. When things deviate from the plan and companies need time to figure things out, this can be an uncomfortable experience for them which manifests itself in unproductive board meetings. Just at the time entrepreneurs need the most support, pessimism can infiltrate the board. Unless quickly addressed this can damage morale in the leadership team and percolate company-wide.

Investors need to reflect on how much their approach can impact an entrepreneur’s mental health and carefully (re-)calibrate it in a way that achieves business outcomes whilst demonstrating empathy. Entrepreneurs should choose their investors wisely and then proactively engage with them to create a supportive and positively challenging board environment.

Unrealistic Expectations

Under promise and over deliver is an oft-quoted management maxim. In the world of venture-backed startups, entrepreneurs have always tried to exceed the budget agreed with their investors or overachieve against expected milestones for the next funding round. Such overachievement demonstrates momentum and builds confidence with investors that the company will be successful.

In 2022, overachievement is expected yet harder than ever to achieve – unrealistic expectations are the new normal.

The problem stems from the excessive amount of capital being invested into companies before they are ready. In much the same way wealthy soccer team owners believe they can achieve cup glory in a single season by throwing money at buying the best players, venture capitalists are making the same mistake. Capital is only one ingredient in building a successful company. For startups, they need time to build out a strong team, iterate and find product-market fit, and make and recover from mistakes.

Taken together, FOMO, unachievable workloads, misaligned boards, and unrealistic expectations can create a toxic cocktail for entrepreneurs. With little sign of the bull market slowing down, we must recognize these risks and approach our work with renewed awareness and empathy. Ultimately, looking out for and protecting the mental health of entrepreneurs is not only the right thing to do; it will also allow more companies to flourish.